Local banks, credit unions steer clear of financial crisis

This is a tough time to be a large financial institution, with the drumbeat of news about "stress tests" and "toxic assets."

BRIAN BOYD

This is a tough time to be a large financial institution, with the drumbeat of news about "stress tests" and "toxic assets."

For local community banks and credit unions, however, it is a different story. These small- and medium-size institutions stuck to traditional banking, steering clear of subprime lending and complex financial instruments at the center of the financial meltdown, local bankers and experts said.

Not only are they weathering the storm, they are seeing a pickup in business, executives at area institutions said.

Peter J. Muise, president and chief executive officer of First Citizens' Federal Credit Union, said his institution avoided high-risk investments because of its ties to the community, something that Wall Street executives lack.

"We live and work in the same communities where we do lending and depositing," Muise said. "We know what is going on, so we don't do subprime lending. That's not good for the community. We're not looking to harm the community."

State-chartered banks ended the first quarter of 2009 with $64.9 billion in deposits, an increase of

$2.4 billion from last year's fourth quarter. The banks' first-quarter numbers also show $57.7 billion in outstanding loans, almost unchanged from the previous quarter, according to the Massachusetts Bankers Association.

These numbers do not include credit unions, which are member-owned institutions and distinct from banks, or nonretail banks, which do not conduct consumer lending.

"In Massachusetts, we have had no bank failures and we had no bank bailouts," said Bruce E. Spitzer, spokesman for the association.

The association, a trade group representing more than 200 banks, compiled the numbers using data from the Federal Deposit Insurance Corp.

Delinquent loans and leases — borrowers who are 90 days or more behind — represented 1.5 percent of all Bay State banks' loans and leases as of March 31, up from 1 percent three months earlier but below the national rate of 3.3 percent, according the association.

Massachusetts banks' troubled assets were also at a lower level than in late 1990, when nearly 7 percent of state institutions' loans and leases were delinquent amid an earlier financial and housing bust.

These banks also have more reserves relative to their delinquent assets than the country's banks as a whole, according to the data.

Many of today's chief executive officers were middle managers in the late 1980s and early 1990s, around the time of the savings and loan crisis. They learned lessons from that period and manage risk better, Spitzer said.

"At Massachusetts banks today, there is three times the amount of capital in reserve than in 1989, 1990 and 1991," he said.

Also, this time around, the Bay State did not experience a housing bubble as inflated as the one that fed construction in states such as Florida and California. In those heated markets, lenders were stuck with bad loans when developers could no longer sell properties, he said.

Community institutions had no need to go beyond their traditional business, said Anita Gentle Newcomb, president of A.G. Newcomb & Co., a Maryland-based bank consulting firm.

"When you look at the average community bank in this country, they're really your hometown bank," Newcomb said. "They mirror the needs of the community where they're located. For most communities, they are the primary source of credit. They don't need to do anything esoteric."

Newcomb said many of her clients see the crisis as a rare opportunity to gain market share.

"Many households and businesses felt disenfranchised by what's going on at large banks," she said. "Many don't trust larger banks. Many clients are seeing business just walk into the door."

Rockland Trust is one of the area banks that said it focused on its core mission.

Chris Oddleifson, the bank's chief executive officer and president, said it stayed away from "credit default swaps and all those nutty things," as well as subprime lending.

"When you stick to what you know and know well, you can stay out of trouble," said Oddleifson, who also is the state bankers association's incoming chairman.

"Being the CEO of a community bank, you have a really heightened understanding that the strength of the bank and the strength of the communities go hand in hand," he said. "You can see the impact you are making directly, and you're a lot closer to the ground."

Rockland is seeing greater demand for commercial loans as businesses look for alternatives to the larger banks, he said.

Rockland did take $78 million in federal money through the Capital Purchase Program, an initiative under the Troubled Asset Relief Program designed to boost lending to businesses and consumers. But Oddleifson said Rockland returned the money because the compensation restrictions affected lower ranks of the organization, not just top executives.

At BankFive, residential lending is picking up, due in part to people refinancing to take advantage of lower mortgage rates, said Thomas F. Lyons, president and chief executive officer.

Also, some businesses are migrating from larger banks to BankFive, Lyons said.

"We deal with every customer as a relationship, one to one," he said.

Local institutions are affected indirectly by the poor economy and housing market, said Ross R. Upton, president and chief executive officer of St. Anne's Credit Union. However, he has seen an increase in the number of people buying houses in the past several weeks.

Like other local institutions, St. Anne's avoided the worst of the financial mess.

"We didn't change our underwriting standards," Upton said. "None of us got caught up in subprime lending or any of that, so we're not directly affected by it."

Spitzer cautioned against looking at financial problems simply as a matter of big bank versus small bank. He said Bank of America probably would be in good shape if it hadn't bought Countrywide Financial Corp. and Merrill Lynch at the government's urging.

Could larger banks look at the healthy, smaller banks and decide to buy them?

Newcomb, the banking consultant, said consolidation will more likely result from small banks merging with each other to achieve greater economy of scale.

At the same, as the government looks to tighten regulation of financial institutions, Muise of First Citizens' said officials should not place too much regulatory burden on smaller banks.

"It could not be good for a community like New Bedford if local community institutions have to do the same things that Bank of America does, when we didn't cause the problem," he said.

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